Traditionally, the way to provide for income after retirement has been to purchase an annuity; turning pension funds that you’ve built up over the years into a regular income. A lifetime annuity does exactly what it says, providing you with a regular income, which is guaranteed for the rest of your life throughout retirement.
However, with current low interest rates and no sign of any increases in the near future, many retirees are discovering that annuity rates are not sufficient to give them the income that they had anticipated, causing a lot of uncertainty and concern to those planning their retirement.
It is possible to tailor an annuity to suit your needs; annuities can be protected against inflation or even set up to provide an income for your spouse or children after your death. Each of these options affects how much income you can take. Many pension funds will allow you to take a tax-free lump sum of up to 25% of the value of your pension pot upon retirement; this can provide you with a means to pay off an existing mortgage, meet the cost of house improvements, or just have the holiday of a lifetime.
Increasingly, both providers and consumers are realising that annuity plans and equity release schemes can complement one another. Talking to one of Bower Service’s impartial specialists can clarify the options available to you when approaching retirement. Presently, both the annuity and equity release markets are offering ‘enhanced’ options that could increase the money available to those of us who have particular lifestyle choices or health complaints.
Some people are choosing to defer buying annuities in the hope that interest rates will rise in the not-too-distant future. Equity release could provide a financial umbrella until the economic climate improves; retirees could then increase the money available to them by taking advantage of higher interest rates, and subsequently improved annuities. Gaining an idea of the annuity that you might expect on retirement is essential for planning your retirement finances. And that brings us to a question that many people ask – how are annuities calculated?
A number of factors go into calculating an annuity, and it can get very complicated! At the basic level, your annuity provider pays you an income based on the lump sum invested into it. They calculate your likely lifespan (based on age and health), the rate of return after charges to operate the investment fund, the amount invested, the payment frequency and timing of payment (at the beginning or end of the month for instance). Of course the original sum invested is the primary factor on which the return is calculated, and also whether you have chosen to “inflation-proof” your income by choosing escalating payments.
Different providers will often use their own actuaries to calculate the variables such as life expectancy and investment return, so annuity rates will vary between providers, making this whole area a minefield to traverse successfully without guidance.
It is increasingly likely that people will seek to supplement annuity income through other schemes such as equity release as it is unlikely that annuity rates will bounce back to their pre-2008 level in the foreseeable future. Apart from low interest rates, life expectancy has increased significantly over the last few decades and the make-up of the typical annuity “pool” is changing. Providers are increasingly segmenting their annuity pools according to lifestyle, health, and postcode. The pool in which you are placed will have either a positive or negative effect on your individual annuity rate.
Without the benefit of a crystal ball, it is difficult to predict the future: however it does seem likely that those already in or approaching retirement, could utilise not just one but several options to ensure that their retirement is as comfortable as possible.
